Most people starting out in business understand that a new company needs a niche if it's going to survive long enough to get itself established. You need one because it allows you to separate yourself from the crowd. It defines which customers you should target and what you can offer them that other suppliers can't. That's critical when you're living off a limited amount of outside capital, as almost every start-up is. You have to make sure that the capital lasts until your customer base is generating the cash flow required for the business to stand on its own. A good niche gives you the means -- and the time -- to do that.

There are, however, three myths about niches that can get in the way of building a successful business. First and foremost is the myth that you have to choose your niche before you start your company. Granted, it's sometimes possible to identify a niche in advance, but often you can't see it until you've actually gone out into the market and begun to sell. That's particularly true when you're entering a highly competitive industry, which is always my preference. Whatever business I go into, I like to know that other people have already figured out how to make money in it. Their success tells me, first, that the market is educated and, second, that there are established ways of doing things I can improve upon. The downside is that there aren't any obvious niches available.

Understand that, in saying you don't need to know your niche before you start, I'm not suggesting you shouldn't have a theory about how your business will succeed. It's just important to remember that theories are frequently wrong. You'll encounter both problems and opportunities you didn't foresee. In responding to them, you'll acquire new information, and that information may well allow you to zero in on a niche you didn't even know existed. Where will the information come from? Your customers.

In almost every company I've started, my customers have told me what my niche should be. Take my records storage company. When I started out, I thought I would be successful by offering great service, state-of-the-art technology, and competitive prices. That's how I'd built Perfect Courier, my Inc. 500 messenger business. But my first attempts at selling our services were miserable failures. Although I learned many valuable lessons from them (see "The Path to the Top," February 2003), they didn't point me to a specific market. So I did what every entrepreneur does: I went through my Rolodex and began working my contacts, many of whom happened to be lawyers.

Pretty soon a curious pattern emerged. A lot of the law firms I talked to kept their records at small moving and storage companies located in New York City -- and had nothing but complaints about the service they were getting. The complaints didn't surprise me. The majority of moving and storage companies got into records storage by accident, when people began coming to them with boxes of documents instead of furniture. Because the business pretty much fell into their laps, most of the companies never developed any real expertise and never bothered to master the latest technology. Their facilities tended to be old and rundown; their racks were makeshift; and there were few if any systems in place to help customers who had to retrieve documents from the boxes they'd stored.

Money was not the issue. My customers said they cared about service, not price -- always music to my ears.

But why, I wondered, didn't those dissatisfied law firms use one of the large records storage companies like Pierce Leahy that were set up specifically to serve the needs of customers like them? Were they just trying to avoid the higher fees that the big companies charged? No, the lawyers told me, money was not an issue. They cared about service, not price (always music to my ears). The problem was that the big records storage companies had built their storage facilities so far outside the city that it was impossible to retrieve documents from them on short notice -- say, within two or three hours -- as law firms must do from time to time.

Bingo! I'd found a niche. I already had a facility that was located across the East River from Manhattan and that was dedicated to providing top-notch service for records storage customers. Now I had an entire industry to go after. We landed our first account with a law firm in 1991 and targeted most of our sales efforts at the legal profession for the next three or four years. By then we had a customer base that was solid enough for us to start branching out.

It was pretty much the same story with my other companies. At Perfect Courier, I found my first niche through a customer at an advertising agency who told me that she and her colleagues were spending a lot of time trying to match deliveries to clients, who would then be billed for the service. All she wanted from us was an invoice that would do the work for her. That sounds like a simple request today, but in 1980 few small companies knew anything about computers. My company happened to have one, and we developed the capability to produce such an invoice before anyone else. As a result, we were able to offer a unique service to ad agencies and other professional service firms that charged deliveries back to their clients. It was a substantial niche, and we dominated it for years.

In the secure document destruction business, we found our niche when customers began asking us about "HIPAA compliance." At first I thought they were referring to some kind of zoo animal. I'd never heard of HIPAA (the Health Insurance Portability and Accountability Act), and I knew nothing about its provisions that require patient records and other confidential medical documents to be destroyed in a secure manner. But I made sure that everybody in the company became an expert in the subject, and we've been focusing on the HIPAA-compliance niche ever since.

It would be nice to think we could stay there indefinitely -- but that's the second myth about niches. Many people assume that when you find your niche, your troubles are over. In fact, no good niche -- by which I mean no profitable niche -- lasts very long unless it's protected by patents or other such legal mechanisms. And even then you're not safe. Just ask the former employees of Polaroid. Why? Because other people are going to catch on and start copying what you do. The more profitable the niche is, the faster it will attract competitors and the faster you'll lose the ability to offer something other suppliers don't.

So you shouldn't stop searching once you've found a niche. Sooner or later you're probably going to need another one. We've already developed a second niche for the document destruction business, based on the automated system we came up with for tracking the number of document disposal bins we empty at any given customer site. (See "Peripheral Vision," November 2002.) Our service people can now give customers a computer-generated receipt on the spot, and afterward we can provide them with a detailed report on the bins we've emptied -- all of which helps us build trust by helping customers monitor what we do. We'll have this niche until our competitors are able to offer something similar.

In the records storage business, we ran through two or three niches in addition to the lawyers who wanted superior service and quick access to their documents. But eventually all of our major competitors copied our practices, and we stopped being a niche company -- which brings up the third myth. Many people believe that only very large corporations can compete outside a niche. It's not true. My company is nowhere near the size of Iron Mountain or Recall -- to name two of the largest records storage companies -- and we haven't been operating in a niche for several years. Indeed, I doubt we'll ever find another one. After 14 years, we know this business pretty well, and our competitors are as sophisticated as we are. I'd be surprised if any of us could come up with a significant innovation that the others wouldn't copy at once, or if someone could suddenly find an underserved and profitable niche that the others wouldn't immediately go after. That doesn't mean that my company doesn't have competitive strengths. They just come from something other than a niche.

So what has taken the niche's place? In a word, reputation. That's how we separate ourselves from the pack these days. When we go out to sell, our reputation is the most important tool we have. The truth is, all of our major competitors can provide more or less the same services on more or less the same terms. But they aren't us. They haven't had the same experiences or learned the same lessons, and they don't have our reputation in the market.

And that's worth keeping in mind as you build your company in whatever niche you happen to find. Someday you may not have a niche to protect you. You and your competitors may all go head-to-head on the same level playing field, and your reputation will be critical. If you've spent your time in the niche working hard to earn a good reputation, you'll probably do fine. Niches come and go, but a reputation can last forever. You have to build it one day at a time.

Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.